Is Seasonal Investing the Best Way to Approach the Market?

GuruFocus.com

- By Nicholas Kitonyi

What happens when the markets stop making sense? How do you even begin to analyze which stocks to invest in?

Over the last two years, markets have defied conventional theories, rallied even when the global economies appeared to be struggling and in the process managed to sway several investors into believing that everything was on a roll.


Yet, at the beginning of this year, that belief was put to the test when stocks in the U.S., Europe, and Asia experienced a plunge. Is the test over? That’s a question that will be met with divided opinion among investors and analysts.

The current market situation has no master and some investors are running scared

Even those who have dedicated themselves to identifying short-term investment opportunities using systems like binary options robots to screen stock price fluctuations over specified periods have had periods of inconsistency. Meanwhile, the market continues to throw surprises from one week to the next.

Over the last five weeks, investors pulled a whopping $44 billion out of the stock market, which prompted analysts to conclude that there might be a "stock market exodus" as investors continue to dump stocks. This is the quickest rate at which investors have sold stocks to the tune of $44 billion since —…––.

Again, this serves as evidence of how the markets are continuing to become more unpredictable thus raising concerns over what would be the best way to approach and analyze stocks. At the moment, fundamentals seem to be having little effect on how investors choose their stocks.

Everyone appears to be following the market. When stocks begin to rise, investors buy, and when they peak, they sell. So, who is creating the environment for the current behavior in the market?

Initially, retail investors would keenly follow the decisions of major hedge funds and renowned investors like Daniel Loeb (Trades, Portfolio), Bill Ackman (Trades, Portfolio), Carl Icahn (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) among others. What happens when they, too, begin to have different opinions at greater lengths?

According to recent reports, Buffett� and Steven Cohen (Trades, Portfolio) are already beginning to blame the hedge fund industry for squeezing return on investments. What does that say to the typical retail investor like you and me? It means things could even be tougher. As such, it might be right to assess new methods of analyzing the market for potential investment opportunities.

While some investors prefer to invest in stocks they have followed over time, others are pretty strategic in the way they identify their stocks. Some call it a top-down process, which involves breaking down the stock market to its specific sectors and then industries, before choosing the stocks in which to invest.

The next thing that follows is to identify which sectors and industry are right for investing, given their particular seasonal booms. For instance, according to Equity Clock, right now may be a good time to invest in technology, health care and consumer staples stocks.

On the other hand, the window for the materials, energy, industrials, consumer discretionary and the financial sectors may have closed over the last couple of weeks. Investors who would wish to invest in those five sectors may have to wait until October in order to catch the market as it begins the next cycle in those sectors.

So let’s put this theory to the test

To some extent, it makes sense. Check the price of Apple (AAPL) for instance; the stock has been stuck at $9… for the majority of the last few weeks and briefly dropped below that level early this week.

Apple will have its major developer event in September, which has over the years proven to be a major trigger for the stock’s rally. But last year, that trend changed as the company’s top line continued to experience slowing growth rates.

Nonetheless, Apple’s shares are currently trading at levels last witnessed in May —…–4. This means that, despite the recent change in history, investors could yet buy into the company’s new products, which will be launched in September.

From the health care sector, stocks like Gilead Sciences (GILD) are trading at levels last witnessed in June —…–4, which also suggests that it could be a good opportunity to invest, especially given the fact that the sector is currently in a "buy season."

In May —…–4, Gilead shares traded at $79 per share and by October of that year, they had rallied to trade at $––…. In May last year, the stock traded at $–…‘ per share and by August, it had rallied to trade at $––8 per share.

So is seasonal investing the best way to approach the market right now? It could be the best approach to take given the unpredictability of the market.

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This article first appeared on GuruFocus.